Here is a picture, taken from a paper by Ben Bernanke, which anyone resisting wage cuts in the Irish context today needs to take seriously. These are countries which (mistakenly) stuck to gold until the bitter end. Like ourselves, therefore, they did not have the option of devaluing. (No, I am not saying we should leave EMU.) The more wages fell, the less output declined. (And yes, the result comes through in regressions which control for other stuff.) The question today is, do we want to end up looking more like Belgium, the Netherlands or Poland, or like France and Switzerland?
2 replies on “The labour demand curve slopes down”
I would argue that gold could equally be manipulated to devalue, that’s exactly what FDR did, he took away privately held gold under rule 6102 and then devalued the dollar by changing the number of troy grains it was worth (basically changed the value of gold from $20 an ounce to $35 and with all that extra money started the New Deal.
Granted you couldn’t do that today – in the age of fiat it doesn’t matter what you do with gold – but I would feel that the example above is not 100% reflective of a currency based on real asset values, as well as that – is inflation included to make this real and not nominal? Inflation has also been a constant byproduct of fiat currency
You get the same negative relationship in the data between real wages and output. But it is interesting to look at nominal wages, since that is what we could cut now.